Existing law regulates arbitrations conducted pursuant to an agreement, as specified.

(1)In an employment or consumer arbitration in which the drafting party, as defined, is required to pay certain fees and costs before the arbitration can proceed, this bill would provide that if the fees or costs to initiate an arbitration proceeding are not paid within 30 days after the due date, the drafting party is in material breach of the arbitration agreement, is in default of the arbitration, and waives its right to compel arbitration. If the drafting party materially breaches the arbitration agreement and is in default of the arbitration, the bill would authorize the employee or consumer to either withdraw the claim from arbitration and proceed in a court of appropriate jurisdiction, or to compel arbitration in which the drafting party is required to pay reasonable attorneys fees and costs related to the arbitration. If the employee or consumer proceeds with an action in a court of appropriate jurisdiction, the bill would provide that the statute of limitations with regard to all claims brought or that relate back to any claim brought in arbitration are tolled, as specified. The bill would further require the court to impose a monetary sanction on the drafting party who materially breaches an arbitration agreement, and would authorize the court to impose other sanctions, as specified.

(2)In an employment or consumer arbitration in which the drafting party, as defined, is required to pay certain fees and costs during the pendency of an arbitration proceeding, this bill would provide that if those fees or costs are not paid within 30 days after the due date, the drafting party is in material breach of the arbitration agreement, is in default of the arbitration, and waives its right to compel arbitration. If the drafting party materially breaches the arbitration agreement and is in default of the arbitration, the bill would authorize the employee or consumer to unilaterally withdraw the claim from arbitration and proceed in a court of appropriate jurisdiction, or to compel arbitration, as specified. If the employee or consumer proceeds with an action in a court of appropriate jurisdiction, the bill would provide that the statute of limitations with regard to all claims brought or that relate back to any claim brought in arbitration are tolled, as specified. The bill would require the court to impose a monetary sanction on the drafting party who materially breaches an arbitration agreement, and would authorize the court to impose other sanctions, as specified. If the employee or consumer compels arbitration, the bill would require the arbitrator to impose appropriate sanctions on the drafting party, including monetary sanctions, issue sanctions, evidence sanctions, or terminating sanctions.

(3)Existing law requires a private arbitration company involved in consumer arbitration cases to collect and make certain information regarding those cases available to the public, as specified.

This bill would additionally require a private arbitration company to collect and report demographic data in the aggregate relative to ethnicity, race, disability, veteran status, gender, gender identity, and sexual orientation of all arbitrators, as specified.

(4)The bill would make related legislative findings and declarations, and would provide that if any provision or its application to any person or circumstance is held invalid, that invalidity does not affect other provisions or applications that can be given effect without the invalid provision or application.

SENATE THIRD READING

STR Bill Id:SB 707

Author:(Wieckowski and Hertzberg)

As Amended Ver:May 20, 2019

Majority vote

SUMMARY:

Provides that the drafting party of a commercial or employment related arbitration agreement is in material breach of the arbitration agreement if the drafting party fails to pay, as required by existing law, specified costs and fees associated with the arbitration proceeding.

Major Provisions

1. Provides that in an employment or consumer arbitration that requires, either expressly or through application of state or federal law or the rules of the arbitration administrator, the drafting party to pay certain fees and costs before the arbitration can proceed, if the fees or costs to initiate or continue an arbitration proceeding are not paid within 30 days after the due date, the drafting party is in material breach of the arbitration agreement, is in default of the arbitration, and waives its right to compel arbitration pursuant to existing law.
2. Provides that in the event of a material breach of an arbitration agreement pursuant, an employee or consumer may, generally withdraw the claim from arbitration and proceed in a court of appropriate jurisdiction, or compel arbitration in which the drafting party shall pay reasonable attorney's fees and costs related to the arbitration.
3. Requires the court to impose a monetary sanction against a drafting party that materially breaches an arbitration agreement pursuant to by ordering the drafting party to pay the reasonable expenses, including attorney's fees and costs, incurred by the employee or consumer as a result of the material breach.
4. Permits the court to impose evidentiary, terminating or contempt sanctions unless the court finds that the one subject to the sanction acted with substantial justification or that other circumstances make the imposition of the sanction unjust.
5. Requires an arbitration company that administers, or is otherwise involved in a consumer arbitration, to also include in the required report the demographic data relative to ethnicity, race, disability, veteran status, gender, gender identity, and sexual orientation of all arbitrators as provided by the arbitrators.
6. Makes various findings and declarations.

COMMENTS:

Arbitration is a form of alternative dispute resolution held outside of courts where a third-party, rather than a judge, makes a binding decision regarding a potential award that is rarely appealable. Arbitration can pose significant difficulties for the party forced to adjudicate its claims outside of court. Existing law permits arbitration agreements to contain limits on evidence presented and the claims that can be considered. Recognizing that many arbitration agreements are contained within contracts of adhesion, courts have sought to add some modicum of fairness to the process by holding that in such contracts, especially when statutory rights are being arbitrated, the agreements cannot require the employee or consumer to "pay either unreasonable costs or any arbitrators' fees or expenses as a condition of access to the arbitration forum." (Cole v. Burns International Security Services (1997) 105 F.3d 1465, 1482.)

This bill provides that any drafting party that fails to pay the fees necessary to commence or continue arbitration, within 30 days after such fees being due to be tendered to the arbitrator, the drafting party is held to have materially breached the arbitration and is in default of the agreement. The bill provides consumers or employees several remedies in the event a drafting party breaches the arbitration agreement by failing to pay the arbitration costs and fees. The bill would permit, should the drafting party fail to pay the costs necessary to commence arbitration, the employee or consumer to remove the matter to court or move to compel the arbitration. In the event that the drafting party fails to pay the fees or costs necessary to continue an arbitration currently in progress, the bill enables the employee or consumer to move the matter to court, seek a court order compelling the payment of the fees, continue the arbitration and permit the arbitrator to seek collection of their fees, or pay the costs and fees and seek those fees from the drafting party at the conclusion of the arbitration regardless of the ultimate outcome. Finally, to deter drafting parties from failing to pay arbitration costs and fees in a timely manner, this bill imposes mandatory monetary sanctions on any drafting party found to be in default of an arbitration agreement for failure to pay costs and fees, and permits the imposition of additional evidentiary, terminating, or contempt sanctions, as the court or arbitrator sees fit.

According to the Author:

SB 707 ensures that individuals who have been forced to submit to mandatory arbitration to resolve an employment or consumer dispute would be provided with procedural options and remedies under this bill when a company stalls or obstructs the arbitration proceeding by refusing to pay the required fees.

Arguments in Support:

The California Employment Lawyers Association states:

SB 707 bill addresses two distinct problems in arbitration. First, the procedural limbo and delay workers and consumers face when they submit to arbitration, pursuant to a mandatory arbitration agreement, but the employer fails or refuses to pay their share of the arbitration fees. Second, the alarming lack of diversity in the arbitration industry, which calls into question the ability of the industry to fairly adjudicate claims brought by an increasingly diverse workforce in California.

Arguments in Opposition:

The Chamber of Commerce states:

The concern is the actions or omissions that qualify as a "material breach" and trigger loss of opportunity to arbitrate, monetary damages/sanctions, and possibly more severe sanctions such as evidentiary or terminating sanctions. For example, we are concerned that, even if the drafting party paid a majority of the fees and costs, but yet a small, minor portion was not paid, SB 707 would deem that nominal amount a "material breach," thereby subjecting the employer or company to the same list of punishments as an employer or company who intentionally withheld the entire payment in an effort to delay the arbitration.

FISCAL COMMENTS:

None

VOTES:

SENATE FLOOR: 29-8-1

YES: Allen, Archuleta, Atkins, Beall, Bradford, Caballero, Chang, Dodd, Durazo, Galgiani, Glazer, Hertzberg, Hill, Hueso, Hurtado, Jackson, Leyva, McGuire, Mitchell, Monning, Pan, Portantino, Roth, Rubio, Skinner, Stern, Umberg, Wieckowski, Wiener

NO: Bates, Grove, Jones, Moorlach, Morrell, Nielsen, Stone, Wilk

ABS, ABST OR NV: Borgeas

ASM JUDICIARY: 8-3-1

YES: Mark Stone, Chau, Chiu, Gabriel, Holden, Kalra, Petrie-Norris, Reyes

NO: Gallagher, Kiley, Obernolte

ABS, ABST OR NV: Maienschein

UPDATED:

VERSION: May 20, 2019

CONSULTANT: Nicholas Liedtke / JUD. / (916) 319-2334 FN: 0001099

Date of Hearing: June 18, 2019

ASSEMBLY COMMITTEE ON JUDICIARY

Mark Stone, Chair

SBPCA Bill Id:SB 707

Author:(Wieckowski) – As Amended Ver:May 20, 2019

SENATE VOTE: 29-8

SUBJECT: Arbitration agreements: breach by drafting party: enforcement

KEY ISSUES:

1. SHOULD THE DRAFTING PARTY OF AN EMPLOYMENT OR CONSUMER RELATED ARBITRATION AGREEMENT THAT FAILS TO PAY FOR A SUBSEQUENT ARBITRATION PROCEEDING BE SUBJECT TO SANCTIONS?
2. SHOULD THE FAILURE OF A DRAFTING PARTY TO PAY THE REQUIRED COSTS AND FEES ASSOCIATED WITH THE ARBITRATION PROCEEDING PERMIT AN EMPLOYEE OR CONSUMER OTHERWISE REQUIRED TO ARBITRATE THEIR CLAIMS TO SEEK REDRESS IN COURT?
3. SHOULD ARBITRATION COMPANIES BE REQUIRED TO PUBLISH SPECIFIED DEMOGRAPHIC INFORMATION REGARDING ARBITRATORS?

SYNOPSIS

Arbitration is a controversial form of alternative dispute resolution held outside of courts where a third-party, typically a retired judge, makes a binding determination in favor of one party to the proceeding. Proponents of arbitration highlight that arbitration can be a more efficient and somewhat lower cost alternative to litigation. Opponents of arbitration contend that decisions can frequently favor the more powerful drafting party, and that rules of evidence or civil procedure can be limited or waived. Despite the ongoing debate over the merits of arbitration, the United States Supreme Court has liberally interpreted the Federal Arbitration Act to preempt state laws regarding arbitration, resulting in arbitration provisions becoming a dominant feature of nearly every employment and consumer contract, contracts that frequently are take-it-or-leave-it contracts of adhesion. Recognizing that arbitration is frequently foisted on consumers and employees by the party drafting these contracts of adhesion, courts have generally required the drafting party to pay for the cost and fees associated with the arbitration as a matter of basic fairness. While case law requires such payment in California, the existing law remains unclear about what remedies an employee or consumer has if a drafting party failed to pay for the arbitration in a timely manner.

Seeking to provide employees and consumers with a clear set of alternatives in the event a drafting party fails to pay for arbitration, this bill offers several remedies. First, this bill provides that if a drafting party fails to pay any costs or fees associated with the arbitration within 30 days of the passing of the due date, the consumer or employee is free to remove the matter to court, or continue with arbitration and seek the recovery of the costs and fees. Additionally, to deter drafting parties from reneging on their obligation to pay the arbitration-related costs and fees, this bill imposes mandatory monetary sanctions on drafting parties and permits the adjudicatory body to impose additional evidentiary or related sanctions on the drafting party. Finally, recognizing that there is currently little information on the demographics of arbitrators, this bill would require arbitration companies to publish self-reporting demographic data voluntarily collected from the arbitrators they employ.

This bill is sponsored by the California Employment Lawyers Association and the Consumer Attorneys of California and is supported by several other labor or consumer protection organizations. The support coalition, representing the parties most likely to find themselves trapped in an unfunded arbitration proceeding, argue that this bill provides employees and consumers with clear remedies in the event that a drafting parties fails to live up to its clear obligations under state law. This measure is opposed by the California Chamber of Commerce and a coalition of business organizations who believe that the current provisions of the bill providing that any failure to pay for arbitration, even a small non-payment, subjects the drafting party to significant sanctions, go too far.

SUMMARY: Provides that the drafting party of a commercial or employment related arbitration agreement is in material breach of the arbitration agreement if the drafting party fails to pay, as required by existing law, specified costs and fees associated with the arbitration proceeding. Specifically, this bill:

1. Adds the following definitions to the California Arbitration Act:
   1. “Consumer” means an individual who seeks, uses, or acquires, by purchase or lease, any goods or services for personal, family, or household purposes;
   2. “Drafting party” means the company or business that included a predispute arbitration provision in a contract with a consumer or employee. The term includes any third party relying upon, or otherwise subject to the arbitration provision, other than the employee or consumer; and
   3. “Employee” means any current employee, former employee, or applicant for employment. The term includes any person who is, was, or who claims to have been misclassified as an independent contractor or otherwise improperly placed into a category other than employee or applicant for employment.
2. Provides that in an employment or consumer arbitration that requires, either expressly or through application of state or federal law or the rules of the arbitration administrator, the drafting party to pay certain fees and costs before the arbitration can proceed, if the fees or costs to initiate an arbitration proceeding are not paid within 30 days after the due date, the drafting party is in material breach of the arbitration agreement, is in default of the arbitration, and waives its right to compel arbitration pursuant to existing law.
3. Provides that in the event of a material breach of an arbitration agreement pursuant to 2), an employee or consumer may do the following:
   1. Withdraw the claim from arbitration and proceed in a court of appropriate jurisdiction; or
   2. Compel arbitration in which the drafting party shall pay reasonable attorney’s fees and costs related to the arbitration.
4. Provides that if an employee or consumer withdraws a claim from arbitration pursuant to 3), the statute of limitations with regard to all claims brought or that relate back to any claim brought in arbitration shall be tolled as of the date of the first filing of a claim in any court, arbitration forum, or other dispute resolution forum.
5. Provides that if the employee or consumer proceeds with an action in a court of appropriate jurisdiction, pursuant to 3), the court shall impose sanctions on the drafting party in accordance with 10) and 11).
6. Provides that in an employment or consumer arbitration that requires, either expressly or through application of state or federal law or the rules of the arbitration provider, that the drafting party pay certain fees and costs during the pendency of an arbitration proceeding, if the fees or costs required to continue the arbitration proceeding are not paid within 30 days after the due date, the drafting party is in material breach of the arbitration agreement, is in default of the arbitration, and waives its right to compel the employee or consumer to proceed with that arbitration as a result of the material breach.
7. Provides that in the event of a material breach of an arbitration agreement pursuant to 6), an employee or consumer may unilaterally elect to do any of the following:
   1. Withdraw the claim from arbitration and proceed in a court of appropriate jurisdiction, and provides that the statute of limitations with regard to all claims brought or that relate back to any claim brought in arbitration shall be tolled as of the date of the first filing of a claim in any court, arbitration forum, or other dispute resolution forum;
   2. Continue the arbitration proceeding, if the arbitration company agrees to continue administering the proceeding, notwithstanding the drafting party’s failure to pay fees or costs and permit the neutral arbitrator or arbitration company to commence a collection action at the conclusion of the arbitration proceeding against the drafting party that is in default of the arbitration for payment of all fees associated with the employment or consumer arbitration proceeding, including the cost of administering any proceedings after the default.
   3. Petition the court for an order compelling the drafting party to pay all arbitration fees that the drafting party is obligated to pay under the arbitration agreement or the rules of the arbitration company; or
   4. Pay the drafting party’s fees and proceed with the arbitration proceeding and permit, as part of the award, the employee or consumer to recover all arbitration fees paid on behalf of the drafting party without regard to any findings on the merits in the underlying arbitration.
8. Provides that if an employee or consumer withdraws a claim from arbitration pursuant to 7) both of the following shall apply:
   1. The employee or consumer may bring a motion, or a separate action, to recover all attorney’s fees and all costs associated with the abandoned arbitration proceeding, and the eventual recovery of arbitration fees, interest, and related attorney’s fees shall be without regard to any findings on the merits in the underlying action or arbitration; and
   2. The court shall impose sanctions on the drafting party in accordance with 10) and 11).
9. Provides that if the employee or consumer continues in arbitration pursuant to 7), the arbitrator may pose appropriate sanctions on the drafting party, including monetary sanctions, issue sanctions, evidence sanctions, or terminating sanctions.
10. Requires the court to impose a monetary sanction against a drafting party that materially breaches an arbitration agreement pursuant to 2) or 6) by ordering the drafting party to pay the reasonable expenses, including attorney’s fees and costs, incurred by the employee or consumer as a result of the material breach.
11. Permits the court, in addition to the monetary sanctions imposed pursuant to 10) to impose any of the following sanctions against a drafting party that materially breaches an arbitration agreement pursuant 2) or 6), unless the court finds that the drafting party subject to the sanction acted with substantial justification or that other circumstances make the imposition of the sanction unjust:
    1. An evidence sanction by an order prohibiting the drafting party from conducting discovery in the civil action;
    2. A terminating sanction that strikes out the pleadings, or parts thereof, by the drafting party or rendering a judgment by default against the drafting party; or
    3. A contempt sanction by an order treating the drafting party as in contempt of court.
12. Requires an arbitration company that administers, or is otherwise involved in a consumer arbitration, to also include in the required report the demographic data relative to ethnicity, race, disability, veteran status, gender, gender identity, and sexual orientation of all arbitrators as provided by the arbitrators.
13. Makes various findings and declarations providing that existing state and federal case law, generally, holds that the drafting party in an employment or consumer arbitration agreement is obligated to pay for the fees and costs associated with arbitration and that a failure to do so renders the arbitration agreement in breach. Provides that the intent of this bill is to affirm the existing case law into statute.
14. Adopts a severability clause.

EXISTING LAW:

1. Governs arbitrations in California, pursuant to the California Arbitration Act (CAA), including the enforcement of arbitration agreements, rules for neutral arbitrators, the conduct of arbitration proceedings, and the enforcement of arbitration awards. (Code of Civil Procedure Section 1280 et seq.)
2. Provides that on petition of a party to an arbitration agreement alleging the existence of a written agreement to arbitrate a controversy and that a party thereto refuses to arbitrate such controversy, the court shall order the petitioner and the respondent to arbitrate the controversy if it determines that an agreement to arbitrate the controversy exists, unless the court determines specified grounds exist. (Code of Civil Procedure Section 1281.2.)
3. Provides that if a court of competent jurisdiction has ordered arbitration of a controversy which is an issue involved in an action or proceeding before a court of this state, the court in which such action or proceeding is pending shall, upon a motion of a party, stay the action or proceeding until an arbitration is conducted. (Code of Civil Procedure Section 1281.4.)
4. States that if an arbitration agreement provides a method of appointing an arbitrator, that method shall be followed. Additionally states that if an arbitration agreement does not provide a method for appointing an arbitrator, the parties to the agreement who seek arbitration and against whom arbitration is sought may agree on a method of appointing an arbitrator and that method shall be followed. (Code of Civil Procedure Section 1281.6.)
5. Prohibits, generally, a private arbitration company from administering a consumer arbitration if the company has, within the previous year, had a financial interest in any party to the case, or representative thereof. (Code of Civil Procedure Section 1281.92.)
6. Requires an arbitration company that administers or is otherwise involved in a consumer arbitration to publish and make available to the public, as specified, a single cumulative report that contains certain information, including the name of the arbitrator, the arbitrator’s fee for the case, the percentage of the fee the arbitrator collected, and whether a fee waiver was granted. (Code of Civil Procedure Section 1281.96.)
7. Provides that, among other behaviors, it is a misuse of the discovery process to utilize tactics that result in unwarranted annoyance, embarrassment, or oppression, or undue burden and expense. (Code of Civil Procedure Section 2023.010.)
8. Provides that the court may impose monetary sanctions on any person engaging in the misuse of the discovery process, or any attorney advising that conduct, or both pay the reasonable expenses, including attorney’s fees, incurred by anyone as a result of that conduct. (Code of Civil Procedure Section 2023.030 (a).)
9. Provides that the court may impose an evidentiary sanction by an order prohibiting any party engaging in the misuse of the discovery process from introducing designated matters in evidence. (Code of Civil Procedure Section 2023.030 (c).)
10. Requires the Governor, the State Bar, and the Administrative Office of the Courts to collect and release each year, on an aggregate statewide basis, specified information regarding the demographic data relative to ethnicity, race, disability, veteran status, gender, gender identity, and sexual orientation of judicial applicants, judicial appointees, or judicial nominees, as provided by them, and the percentage of respondents who declined to respond. (Government Code Section 12011.5 (n).)

FISCAL EFFECT: As currently in print this bill is keyed non-fiscal.

COMMENTS: Recognizing that many arbitration agreements are placed into contracts of adhesion, this bill seek to protect employees and consumers by ensuring that the party that drafts the arbitration agreement cannot delay adjudication of a dispute by refusing to participate in, or pay for, arbitration. Specifically, building on an existing body of case law, this bill would hold that if the fees or costs required to initiate or continue an arbitration proceeding are not paid by the drafting party within 30 days of the due date, that party is in default of the agreement and the employee or consumer may seek to pursue their claims in court and trigger sanctions on the drafting parties. In support of this bill, the author states:

SB 707 ensures that individuals who have been forced to submit to mandatory arbitration to resolve an employment or consumer dispute would be provided with procedural options and remedies under this bill when a company stalls or obstructs the arbitration proceeding by refusing to pay the required fees.

As arbitration provisions have become ubiquitous in employment and consumer contracts, the parties drafting these adhesion contracts have gained significant advantages. Arbitration is a form of alternative dispute resolution held outside of courts where a third-party, rather than a judge, makes a binding decision regarding a potential award that is rarely appealable. Arbitration can pose significant difficulties for the party forced to adjudicate its claims outside of court. Existing law permits arbitration agreements to contain limits on evidence presented and the claims that can be considered. Arbitration can also save employers and providers of consumer goods and services significant time and costs when compared to court, thus there is little question why the more powerful signatory to a contract would demand arbitration.

Most arbitration agreements are contained within a broader contract, usually a contract that is adhesive or take-it-or-leave-it. The arbitration agreement will lay-out the procedures that will be followed during the arbitration hearing. For example, the terms of the arbitration agreement may stipulate that the award need not be written or justified, unlike in court, and that the entire process be kept in secret. Arbitrators do not need to be lawyers, nor do they need to be trained in the law. Arbitrators who issue favorable awards to a particular company can be repeatedly-hired by that same company to serve as the arbitration-neutral without ever notifying the public about that award-history. It’s easy to predict the calls if you can hire the umpire.

Over the past twenty years, federal courts have significantly expanded the validity of arbitration provisions in contracts of adhesion and considerably infringed on state’s ability to regulate such agreements. (See, e.g., AT&T Mobility LLC v. Concepcion (2011)562 U.S. 333.) Recognizing that many arbitration agreements are contained within contracts of adhesion, courts have sought to add some modicum of fairness to the process by holding that in such contracts, especially when statutory rights are being arbitrated, the agreements cannot require the employee or consumer to “pay either unreasonable costs or any arbitrators’ fees or expenses as a condition of access to the arbitration forum.” (Cole v. Burns International Security Services (1997) 105 F.3d 1465, 1482.) In California, both state and federal courts have adopted the standard utilized by the United States Court of Appeals for the District of Columbia Circuit in the Cole decision. Accordingly, any time an employment or consumer contract requires arbitration, the drafting party should be paying the associated fees.

Given that employees and consumers frequently possess little if any choice in agreeing to arbitrate claims, the requirement that a drafting party pay for the cost of the arbitration is wholly reasonable. However, when the drafting party fails to properly pay for the arbitration, existing law does not provide the employee and customer with a clear means to redress their harms. Although courts have held that such failures to pay for arbitration may be grounds to invalidate an arbitration agreement, state law does not provide clear guidance for courts and litigants in the event a drafting party fails to properly pay to commence arbitration in a timely manner.

While existing case law requires the drafting party to pay for arbitration, some companies fail to comply with these requirements. As remedies for employees and consumers have narrowed, the rate of arbitration filings has increased significantly. For example, after Uber won the right to prohibit its drivers from contesting wage claims as a class, the company was forced to arbitrate the claims of over 12,500 drivers. (O’Connor v. Uber Techs. (2018) 904 F.3d 1087.) Similarly, the burrito chain Chipotle was forced to arbitrate over 2,800 wage theft claims in recent years. While proponents of arbitration continue to argue that it is a cheaper, faster, more efficient way to resolve disputes in comparison to the overburdened court system, arbitration requirements can quickly burdensome for companies facing significant numbers of claims.

Though there is a significant degree of irony that many company’s strident instance on inserting class action waivers into arbitration agreements is now burdening their corporate legal departments with thousands of individual claims in arbitration, the side effect of such actions are now being felt by employees and consumers as well as the companies. For example, of the 12,500 demands for arbitration filed by Uber drivers, the company has only paid its initial filing fee in 296 cases. (Frankel, Alison, Forced into arbitration, 12,500 drivers claim Uber won’t pay fees to launch cases, Reuters (Dec. 6, 2018).) As a result, only 47 arbitrators have been appointed to handle the Uber disputes; of those, Uber has only paid the $1,500 retention fee in six cases. (Ibid.) Paradoxically, by refusing to pay the arbitration costs and fees as required by law, Uber and other similarly situated companies are managing to delay the adjudication of claims and postpone the payment of any potential judgments against the company in the name of a process that is supposed to be cheaper and easier for the parties. Because existing case law forces companies to pay for arbitration, but does not provide clear remedies for employees or consumers who are caught in limbo by unpaid arbitration fees, this lack of clarity means that a drafting party can avoid the consequences of their behavior by not paying for the dispute to be arbitrated.

This bill. Recognizing that the failure of a drafting party to pay arbitration fees in a timely manner can inflict significant harm on consumer and employees, this bill adds several provisions to existing law to enable employees and consumers to seek redress of their claims in a timely manner, and establishes disincentives to ensure that such behavior does not occur in the first place.

First, this bill provides that any drafting party that fails to pay the fees necessary to commence or continue arbitration, within 30 days after such fees being due to be tendered to the arbitrator, the drafting party is held to have materially breached the arbitration and is in default of the agreement.

Second, this bill provides consumers or employees several remedies in the event a drafting party breaches the arbitration agreement by failing to pay the arbitration costs and fees. The bill would permit, should the drafting party fail to pay the costs necessary to commence arbitration, the employee or consumer to remove the matter to court or move to compel the arbitration. In the event that the drafting party fails to pay the fees or costs necessary to continue an arbitration currently in progress, the bill enables the employee or consumer to move the matter to court, seek a court order compelling the payment of the fees, continue the arbitration and permit the arbitrator to seek collection of their fees, or pay the costs and fees and seek those fees from the drafting party at the conclusion of the arbitration regardless of the ultimate outcome.

Finally, to deter drafting parties from failing to pay arbitration costs and fees in a timely manner, this bill imposes mandatory monetary sanctions on any drafting party found to be in default of an arbitration agreement for failure to pay costs and fees, and permits the imposition of additional evidentiary, terminating, or contempt sanctions, as the court or arbitrator sees fit.

Furthermore, recognizing that the state has very little information regarding the demographics of those serving as arbitrators, this bill would require arbitration companies to report demographic data, on an aggregate basis, regarding the ethnicity, race, disability status, veteran status, gender, gender identity, and sexual orientation of all arbitrators. The bill would permit this information to be provided on a self-reporting basis by arbitrators and would require the arbitration company to disclose the percentage of arbitrators who declined to respond.

Justice delayed is justice denied. As noted above, employees and consumers forced to arbitrate claims against large companies are at a distinct disadvantage. Should the ambiguity in existing statutes permit companies that draft arbitration agreements to delay the adjudication of claims, these drafting parties can simply deny claimants any semblance of justice by simply refusing to pay for the arbitration they contracted for. Indeed, if such a system were permitted to continue, courts have suggested this would create a, “perverse incentive scheme” whereby “employers… would have an incentive to refuse to arbitrate claims brought by employees in the hope that the frustrated employees would simply abandon them.” (Brown v. Dillards, Inc. (2005) 430 F.3df 1004, 1012.)

To ensure that a drafting party cannot unilaterally prevent a party from adjudicating their claims in the forum that the drafting party unilaterally foisted onto the claimant, this bill would provide employees and consumers remedies if a drafting party refuses to pay. Most importantly, this bill provides employees and consumers to get their claim adjudicated in the venue of their choice in a timely manner.

The sanctions provided in this bill are intended to deter bad actors. In opposition to this measure, the California Chamber of Commerce, and a coalition of business organizations, object to the provisions of this bill providing that failure to pay arbitration costs and fees in a timely manner constitutes a material breach of a contract. A material breach is typically viewed as a breach of contract so serious as to permit the non-breaching party to excuse additional performance of the contract, in this case remain in arbitration. Not only would this bill excuse the performance of the contract in the case of a material breach, but it would also impose sanctions on the breaching party. The California Chamber of Commerce notes that these provisions may impose sanctions even if, “the drafting party paid a majority of the fees and costs, but yet a small, minor portion was not paid.” The opposition appears to argue that a relative small non-payment of arbitration fees or costs should not constitute a material breach of the contract.

The opposition is not incorrect in stating that a failure to pay the required costs and fees in full would expose a company to significant monetary penalties and potentially serious evidentiary sanctions or a contempt holding. However, this risk should also be viewed in light of the harm that the drafting party’s breach of contract could impose on employees or consumers who are in limbo, with no avenue to pursue their legal rights. Particularly in employment matters, the plaintiff’s livelihood may be the subject of the adjudication. Although a large company may view its failure to pay a few hundred dollars for arbitration as a minor, immaterial, mistake, that mistake may delay the hearing of an employee’s claims. While immaterial to the drafting party, the ensuing delay associated with this minor error could be significant to the employee, who may not be able to pay bills, rent or other expenses that could result in the loss of their residence, or damage to their credit rating, while the dispute remains unresolved. For example, when chastising Chipotle’s request to delay the filing of arbitration claims on the grounds that the claims were overwhelming the company, the court stated that the company’s attempt to delay and obfuscate the adjudication of claims was “unseemly.” (Order Denying Defendant Chipotle Mexican Grill, Inc’s Motion for Entry of Judgement Pursuant to Fed. R. Civ. P. 54(B) (ECF No. 202) and Motion to Reinstate Stay (ECF No. 203), Kane, J., Case No. 1-14-cv-02612-JLK, Document 212, (Nov. 20, 2018), U.S.D.C. Colorado.) Furthermore, as noted in the Dillard’s case, a failure to stop such conduct would establish a perverse incentive for drafting parties to demand arbitration in a contract of adhesion and then refuse to pay the arbitrator when a claim was made. In light of the extreme hardship that needlessly delaying arbitration may cause to plaintiffs, the material breach and sanction provisions of this bill would seem to be a strict yet reasonable method to ensure the timely adjudication of employee and consumer claims that are subject to arbitration.

This bill appears to narrowly target those who are most at risk from predatory arbitration delays. In keeping this bill in line with much of the existing case law, the author focuses on arbitration involving employment and consumer disputes. After negotiations between the stakeholders, the definition of consumer was narrowed in the Senate to only include persons who “purchase or lease” good and services. The bill currently defines an employee as, “any current employee, former employee, or applicant for employment” and includes any person who “is, was, or who claims to have been misclassified as an independent contractor,” or otherwise misclassified in their employment.

Beyond the opposition to this bill stated by the California Chamber of Commerce and their associated coalition, the San Gabriel Valley Economic Partnership contends that the definition of employee provided by this bill is too broad. In particular, the Partnership objects to the inclusion of employees who allege they are misclassified as independent contractors. This objection appears to encompass many of the “gig economy” employees who have fought for years in courts and in arbitration to be properly classified under the law. The Partnership contends that, “under the proposed definition, this individual could request the company pay for the arbitrator…even if the actual contract between a company and independent contractor provides otherwise. If the company refuses to pay within 30 days on the basis that the individual is not an employee…this would be a material breach.”

Ironically, many of the “independent contractors” that the San Gabriel Valley Economic Partnership would like to see pay their share of the fees actually involve employees misclassified as independent contractors. For example, entwined within the wage claims against Uber, discussed above, included allegations of employee misclassification. It should be noted that nothing in this bill would preclude an arbitrator from subsequently requiring a plaintiff to reimburse a drafting party for arbitration costs and fees should the arbitrator determine the plaintiff was in fact an independent contractor. Furthermore, the intent of the case law requiring the drafting party to pay for arbitration reflects the general belief that fairness dictates that the law “places the cost of arbitration on the party that imposes it.” (Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal. 83, 111.) The case law notes that in the absence of such a rule there is “significant risk that employees will have to bear large costs to vindicate their statutory right.” (Id.at p. 110.) Many of the independent contractors in the “gig economy” face similar economic hardships as employees. Recognizing that the intent of the case law this bill seeks to codify is to protect the economically vulnerable party in an arbitration, including misclassified workers, incorporating such plaintiffs into the definition of employee seems wholly consistent with the case law and is a reasonable component this bill.

Changes in corporate circumstances and the burdens of arbitration. The entire coalition opposing this bill also notes that the strict provisions surrounding the breach of the contract and associated sanctions are unfair to companies who no longer possess the “same financial means” at the time arbitration is demanded as the company did when they drafted the contract providing arbitration as the only venue for consumers or employees to adjudicate issues. While they concede that such a circumstance may warrant moving the dispute to court they contend imposing sanctions in such a case would be unwarranted.

The concerns of the business community are not wholly unjustified. For example, should a recession drive a company to the brink of bankruptcy, the company may truly have no ability to pay for arbitration through no fault of their own. Nevertheless, regardless of a company’s situation, a business that finds itself stuck in an arbitration it cannot afford can easily trace its own choice – perhaps motivated by corporate America’s zealous insistence on placing binding arbitration provisions in nearly every contract of adhesion it signs with employees or consumers – to require arbitration. Furthermore, regardless of a company’s finances, it should be noted that existing binding arbitration agreements leave employees and consumers with few remedies. While a company is attempting to determine its ability to afford arbitration, the existing law is leaving employee and consumer claims in limbo. Accordingly, the sanctions, while unforgiving, seem justified regardless of the present economic status of the drafting party. Perhaps, in order to lessen their risk of sanctions, drafting parties should reconsider their liberal use of binding arbitration provisions in contracts, or at a minimum, consider drafting these agreement in a manner that provides all parties increased access to the court system in the event circumstances arise that warrant adjudicating disputes in court.

Presently the legal profession is attempting to study and address its struggle to diversify, however, despite their critical role in the legal system, very little data exists regarding the diversity of arbitrators. Last month, this Committee held an informational hearing examining the legal profession’s striking lack of diversity. As a part of the background for that hearing the Committee highlighted data from the State Bar of California that noted that 80 percent of California attorneys were white, compared with just 37 percent of the state’s population as a whole. The Committee also expressed a concern that the present lack of diversity found within the bar and on the bench may translate into the ranks of arbitrators, especially given that most arbitrators are typically retired attorneys or judges. Notably, iconic music mogul Jay-Z raised this concern when he challenged the American Arbitration Association’s purported lack of qualified African Americans on its roster of arbitrators. Jay-Z stated, “It would stand to reason that prospective litigants – which undoubtable include minority owned and operated business – expect there to be the possibility that the person who stands in the shoes of both judge and jury reflect the diverse population.” (Dan Packel, Jay-Z, Quinn Emanuel Say AAA Offers Only “Token” Black Arbitrators, The Recorder (Nov. 28, 2018), quoting Jay-Z.)

A 2015 survey of arbitrators nationwide would seem to justify the concerns of both Jay-Z and this Committee, finding that a staggering 92 percent of arbitrators were white and 74 percent were male. (Colvin & Stone, The Arbitration Epidemic- Mandatory arbitration deprives workers and consumers of their rights, Economic Policy Institute (Dec. 7, 2015).) The proponents of this measure note that although California collects significant information regarding arbitration companies’ behavior, as well as significant demographic data about judges and attorneys, the state does not collect demographic data regarding arbitrators. Accordingly, this bill seeks to impose a modest, self-reporting demographic data requirement on arbitration companies. In support of these provisions the author states:

SB 707 will also require arbitration companies to report the same kind of demographic information that our judiciary is required to report (including gender, race and ethnicity). The purpose of this is to hopefully galvanize some better recruitment and hiring practices by the arbitration companies and highlight the fact that arbitration cannot be a fair process when the arbitrators do not remotely reflect the diverse experiences and backgrounds of the people who are bringing their claims before them, or are forced to bring their claims before them, which is very often the case.

It should be noted that none of the opposition to this measure objects to the demographic data collection provisions.

ARGUMENTS IN SUPPORT: This bill is co-sponsored by the Consumer Attorneys of California and the California Employment Lawyers Association who represent many of the parties in the arbitration proceedings in which the drafting party may fail to pay for the costs of the proceedings. In support of the bill the California Employment Lawyers Association states:

SB 707 bill addresses two distinct problems in arbitration. First, the procedural limbo and delay workers and consumers face when they submit to arbitration, pursuant to a mandatory arbitration agreement, but the employer fails or refuses to pay their share of the arbitration fees. Second, the alarming lack of diversity in the arbitration industry, which calls into question the ability of the industry to fairly adjudicate claims brought by an increasingly diverse workforce in California.

ARGUMENTS IN OPPOSITION: This bill is opposed by the California Chamber of Commerce and a coalition of affiliated business organizations. Writing for the coalition, the Chamber of Commerce states:

The main remaining concern is the actions or omissions that qualify as a “material breach” and trigger loss of opportunity to arbitrate, monetary damages/sanctions, and possibly more severe sanctions such as evidentiary or terminating sanctions. For example, we are concerned that, even if the drafting party paid a majority of the fees and costs, but yet a small, minor portion was not paid, SB 707 would deem that nominal amount a “material breach,” thereby subjecting the employer or company to the same list of punishments as an employer or company who intentionally withheld the entire payment in an effort to delay the arbitration.

REGISTERED SUPPORT / OPPOSITION:

Support

California Employment Lawyers Association (co-sponsor)

Consumer Attorneys of California (co-sponsor)

California Labor Federation

California Professional Firefighters

Conference of California Bar Associations

Equal Rights Advocates

SEIU California

United Food and Commercial Workers, Western States Council

Opposition

Allied Managed Care and Acclamation Insurance Management Services

California Apartment Association

California Association of Joint Powers Authorities

California Association of Winegrape Growers

California Chamber of Commerce

California Hospital Association

California League of Food Producers

California Manufacturers and Technology Association

California Restaurant Association

California Retailers Association

California Trucking Association

CSAC – Excess Insurance Authority

Flasher Barricade Association

Official Police Garages of Los Angeles

San Gabriel Valley Economic Partnership

Securities Industry and Financial Markets Association

Analysis Prepared by: Nicholas Liedtke / JUD. / (916) 319-2334

 THIRD READING  

Bill No: SB 707

Author: Wieckowski (D) and Hertzberg (D), et al.

Amended: 5/20/19

Vote: 21

SENATE JUDICIARY COMMITTEE: 8-0, 4/23/19

AYES: Jackson, Borgeas, Allen, Caballero, Monning, Stern, Umberg, Wieckowski

NO VOTE RECORDED: Jones

SUBJECT: Arbitration agreements: enforcement

SOURCE: California Employment Lawyers Association

Consumer Attorneys of California

DIGEST:

This bill provides that if an employment or consumer arbitration requires the drafting party to pay fees and costs regarding the arbitration and those fees or costs are not paid within 30 days after the due date, then the drafting party is in material breach of the arbitration agreement, is in default of the arbitration, and waives its right to compel arbitration, and authorizes the employee or consumer to the arbitration agreement to compel arbitration or proceed in court, as specified. This bill requires the court to impose a monetary sanction on the drafting party in material breach of the arbitration agreement and authorizes the court to impose other sanctions on the drafting party if the drafting party fails to pay costs or fees, as specified. This bill also requires arbitration companies to include specified demographic data regarding its arbitrators as self-reported by the arbitrators in a report arbitration companies are already required to make under existing law, as provided.

Senate Floor Amendments of 5/20/19 (1) change the definition of “consumer” to specify that a consumer is a person who acquired goods or services by purchase of lease ; (2) clarify that the drafting party is in material breach if fees or costs to initiate arbitration are not paid within 30 days after the due date; (3) clarify that the statute of limitations are to be tolled with regard to all claims brought or that relate back to any claim brought in arbitration; (4) require the court to impose monetary sanctions against a drafting party that material breaches an arbitration agreement for failure to pay fees or costs; and (5) authorize the court to impose other sanctions unless the court finds that the one subject to the sanction acted with substantial justification or that other circumstances make the imposition of the sanction unjust.

ANALYSIS: Existing federal law provides, pursuant to the Federal Arbitration Act (FAA), that a written provision in any maritime transaction or a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof, or an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal, shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract. (9 U.S.C. § 2.)

Existing state law:

1. Governs arbitrations in California, pursuant to the California Arbitration Act (CAA), including the enforcement of arbitration agreements, rules for neutral arbitrators, the conduct of arbitration proceedings, and the enforcement of arbitration awards. (Code Civ. Proc. §§ 1280 et. seq.)
2. Provides that on petition of a party to an arbitration agreement alleging the existence of a written agreement to arbitrate a controversy and that a party thereto refuses to arbitrate such controversy, the court shall order the petitioner and the respondent to arbitrate the controversy if it determines that an agreement to arbitrate the controversy exists, unless the court determines specified grounds exist. (Code Civ. Proc. § 1281.2.)
3. Requires an arbitration company that administers or is otherwise involved in a consumer arbitration to publish and make available to the public, as specified, a single cumulative report that contains certain information, including the name of the arbitrator, the arbitrator’s fee for the case, the percentage of the fee the arbitrator collected, and whether a fee waiver was granted. (Code Civ. Proc. § 1281.96.)
4. Requires the Governor, the State Bar, and the Administrative Office of the Courts to collect and release each year, on an aggregate statewide basis, specified information regarding the demographic data relative to ethnicity, race, disability, veteran status, gender, gender identity, and sexual orientation of judicial applicants, judicial appointees, or judicial nominees, as provided by them, and the percentage of respondents who declined to respond. (Gov. Code § 12011.5(n).)

This bill:

1. Provides that if an employment or consumer arbitration requires the drafting party to pay fees and costs before arbitration can proceed and those fees or costs are not paid within 30 days after the due date, then the drafting party is in material breach of the arbitration agreement, is in default of the arbitration, and waives its right to compel arbitration.
2. Provides that if an employment or consumer arbitration requires the drafting party to pay fees or costs during the pendency of an arbitration proceeding and those fees or costs are not paid within 30 days after the due date, then the drafting party is in material breach of the arbitration agreement, is in default of the arbitration, and waives its right to compel arbitration, and authorizes the employee or consumer to proceed as provided.
3. Authorizes an employee or consumer, if the drafting party materially breaches the arbitration agreement by not paying fees or costs, to withdraw the claim from arbitration and proceed in a court of appropriate jurisdiction, as specified, or to compel arbitration, as specified.
4. Requires the statute of limitations with regard to all claims brought or that relate back to any claim brought in arbitration to be tolled as of the date of the first filing of a claim in any court, arbitration forum, or other dispute resolution forum if the employee or consumer withdraws the claim from arbitration and proceeds with an action in a court of appropriate jurisdiction.
5. Requires the court to impose a monetary sanction against a drafting party that materially breaches an employment or consumer arbitration agreement by ordering the drafting party to pay the reasonable expenses incurred by the employee or consumer as a result of the material breach, and authorizes the court to impose additional sanctions against the drafting party unless the court finds that the one subject to the sanction acted with substantial justification or that other circumstances make the imposition of the sanction unjust.
6. Revises the definition of certain existing terms under the CAA, and defines the terms “consumer,” “drafting party,” and “employee,” as provided.
7. Requires an arbitration company that administers, or is otherwise involved in a consumer arbitration, to also include in the required report the demographic data relative to ethnicity, race, disability, veteran status, gender, gender identity, and sexual orientation of all arbitrators as self-reported by the arbitrators, and requires the report to indicate the percentage of respondents who declined to respond.
8. Makes various legislative findings and declarations.

Comments

Arbitration is a method of alternative dispute resolution where the disputing parties are required as a matter of law to present their disagreement to one or more private third-party arbitrators whose decisions are generally final and binding, instead of litigating the issues in court. Mandatory arbitration clauses, especially in employment and consumer contracts, have been a topic of significant controversy over the years as a form of alternative dispute resolution. Recently, a concerning and troubling trend has arisen in arbitration: employers are refusing to pay required fees to initiate arbitration, effectively stymieing the ability of employees to assert their legal rights.^[1]

In response to this emerging trend, this bill seeks to affirm that when a company refuses to pay fees required under an employment or consumer arbitration agreement it is in material breach of the arbitration agreement, is in default of the arbitration, and waives its right to compel arbitration and provide procedural options to remedy the breach of contract. In order to deter companies and employers from strategically withholding the payment of arbitration fees, the company in breach is required to pay reasonable attorney’s fees and costs and the court is required to impose sanctions.

The U.S. Supreme Court has declared that the FAA represents Congress's intent "to move the parties to an arbitrable dispute out of court and into arbitration as quickly and easily as possible.”^[2] In Sink v. Aden Enterprises, the Ninth Circuit affirmed the district court’s finding that a party is in default of an arbitration agreement if it fails to pay required arbitration fees.^[3] The court stated in Sink that interpreting the FAA to allow a party refusing to cooperate with arbitration to indefinitely postpone litigation is “inconsistent with the structure and purpose of the FAA.”^[4] As these procedures are intended to stop behavior that would undermine the intent of Congress, this measure should not frustrate the purposes of the FAA.

Under existing law, the Governor, the State Bar, and the Administrative Office of the Courts is required to collect and release, on an aggregate statewide basis so as not to identify any individual, information regarding the demographic data relative to ethnicity, race, disability, veteran status, gender, gender identity, and sexual orientation of judicial applicants, judicial appointees, and judicial nominees as provided by them and the percentage of respondents who declined to respond.^[5] This bill seeks to apply this same requirement to private arbitration companies by requiring arbitration companies to include this information in the report they are already required to provide to the public under existing law.

FISCAL EFFECT: Appropriation: No Fiscal Com.: No Local: No

SUPPORT: (Verified 5/21/19)

California Employment Lawyers Association (co-source)

Consumer Attorneys of California (co-source)

California Conference Board of the Amalgamated Transit Union

California Conference of Machinists

California Labor Federation

California Teamsters

Conference of California Bar Associations

Engineers and Scientists of California, IFPTE Local 20, AFL-CIO

Equal Rights Advocates

Inlandboatmen’s Union of the Pacific

PolicyLink

Professional and Technical Engineers, IFPTE Local 21, AFL-CIO

SEIU California

UFCW Western States Council

UNITE-HERE, AFl-CIO

Utility Workers of America

OPPOSITION: (Verified 5/21/19)

Acclamation Insurance Management Services

Allied Managed Care

California Association of Winegrape Growers

California Chamber of Commerce

California Hospital Association

California League of Food Producers

California Manufacturers and Technology Association

California Restaurant Association

California Retailers Association

California Trucking Association

Flasher Barricade Association

Official Police Garages of Los Angeles

Securities Industry and Financial Markets Association

ARGUMENTS IN SUPPORT: The author writes:

With SB 707, individuals who have been forced to submit to mandatory arbitration to resolve an employment or consumer dispute would be provided with procedural options and remedies under this bill when a company stalls or obstructs the arbitration proceeding by refusing to pay the required fees.

The bill will also require arbitration companies to report the same kind of demographic information that our judiciary is required to report (including gender, race and ethnicity). The purpose of this is to hopefully galvanize some better recruitment and hiring practices by the arbitration companies and highlight the fact that arbitration cannot be a fair process when the arbitrators do not remotely reflect the diverse experiences and backgrounds of the people who are bringing their claims before them, or are forced to bring their claims before them, which is very often the case.

The California Employment Lawyers Association, one of the sponsors of the bill, writes:

[T]hese cases highlight a glaring loophole in this new era of mandatory arbitration: workers and consumers must submit to arbitration, while corporations may choose their forum by either submitting to arbitration or stalling the process back to court by refusing to pay fees. This tactic typically occurs at two stages in the arbitration process. First, a company could refuse to pay the initial filing fee, which would stall the commencement of the arbitration proceedings – causing costly delays that jeopardize an employee’s ability to find evidence and witnesses – and forcing the case to restart in court. Second, a company could refuse to pay fees during the course of the arbitration proceedings – often, to prevent the release of a judgment or award favorable to the worker. Stalling the arbitration in this scenario can be even more damaging and prejudicial, as the employee or consumer has likely already invested significant resources to develop their case. Moreover, even if a case could be restarted in court, all of the work and findings from the arbitration proceeding does not carry over to the new court proceeding. Thus, without clear procedures, consumers and employees are saddled with the consequences of a stalled case, forcing them to abandon their claim or invest even more resources to relitigate in court. SB 707 aims to provide a clear process and remedies for consumers and employees in the event that the company fails to pay its required arbitration fees […]

[T]he alarming lack of diversity in the arbitration industry […] calls into question the ability of the industry to fairly adjudicate claims brought by an increasingly diverse workforce in California […] The value of diversity in our justice system cannot be overstated – to have a jury of one’s peers is enshrined in our Constitution. In California, “[i]ncreasing the diversity of California’s judicial officers to reflect the rich diversity of California’s populace” is a “key goal” and for thirteen years the state has been collecting demographic information of its judges and justices in order to track this commitment. However, these values and commitments to diversity lie fallow when more and more cases are forced into arbitration, a privatized justice system where there is no oversight or accountability, particularly when it comes to who is arbitrating these cases […]

The Consumer Attorneys of California, co-sponsor of the bill, writes:

Forced arbitration provisions have become an ever-growing aspect of consumer transactions and employment relationships. Over half of America’s workforce has been forced to sign arbitration agreements as a condition of employment. Under these terms, consumers and workers whose rights have been violated cannot pursue their claims in court, and instead must submit their claims to an arbitration proceeding that overwhelmingly favors businesses and employers.

With workers and consumers then barred from court, businesses are able to strategically withhold payment to the arbitration service provider to obstruct the arbitration proceeding and the ability to pursue a claim […]

Our courts have made advancements in diversity over the decades and this is not the case among private arbitration companies. Data should be collected and reported in order to better evaluate the issue.

ARGUMENTS IN OPPOSITION: Opponents of the bill, a coalition of various business organizations, write:

While we agree with the notion that the failure of a drafting party to intentionally pay for a significant amount of the arbitrator’s fees in an effort to avoid or delay the arbitration, should allow the employee or consumer to proceed to civil court, the remaining sanctions and damages proposed in SB 707 are completely unjustified, unreasonable, and unprecedented […]

There is no justification that requires a private company to intrude upon the privacy of an individual and require them to disclose such personal information.

Opponents also raised concerns over the definition of “consumer” and “employee,” over what constitutes a material breach under the provisions of the bill, the remedies provided for that breach, and the various sanctions in the bill.

Prepared by: Amanda Mattson / JUD. / (916) 651-4113

5/21/19 17:49:35

**** END ****

1. For a more in depth discussion, see the Senate Judiciary Committee Analysis for SB 707 (Wieckowski, 2019). ↑

2. Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., (1983) 460 U.S. 1, at 22. ↑

3. Sink v. Aden Enters. (2003) 352 F.3d 1197. ↑

4. Id. at 1200. ↑

5. Gov. Code § 12011.5(n)(1) & (n)(5). ↑

 THIRD READING  

Bill No: SB 707

Author: Wieckowski (D) and Hertzberg (D), et al.

Amended: 4/30/19

Vote: 21

SENATE JUDICIARY COMMITTEE: 8-0, 4/23/19

AYES: Jackson, Borgeas, Allen, Caballero, Monning, Stern, Umberg, Wieckowski

NO VOTE RECORDED: Jones

SUBJECT: Arbitration agreements: enforcement

SOURCE: California Employment Lawyers Association

Consumer Attorneys of California

DIGEST:

This bill provides that if an employment or consumer arbitration requires the drafting party to pay fees and costs regarding the arbitration and those fees or costs are not paid within 30 days of their due date, then the drafting party is in material breach of the arbitration agreement, is in default of the arbitration, and waives its right to compel arbitration, and authorizes the employee or consumer to the arbitration agreement to compel arbitration or proceed in court, as specified. This bill requires the court to sanction a drafting party for failure to pay costs or fees, as provided. This bill also requires arbitration companies to include specified demographic data regarding its arbitrators as self-reported by the arbitrators in a report arbitration companies are already required to make under existing law, as specified.

ANALYSIS: Existing federal law provides, pursuant to the Federal Arbitration Act (FAA), that a written provision in any maritime transaction or a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof, or an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal, shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract. (9 U.S.C. § 2.)

Existing state law:

1. Governs arbitrations in California, pursuant to the California Arbitration Act (CAA), including the enforcement of arbitration agreements, rules for neutral arbitrators, the conduct of arbitration proceedings, and the enforcement of arbitration awards. (Code Civ. Proc. §§ 1280 et. seq.)
2. Provides that on petition of a party to an arbitration agreement alleging the existence of a written agreement to arbitrate a controversy and that a party thereto refuses to arbitrate such controversy, the court shall order the petitioner and the respondent to arbitrate the controversy if it determines that an agreement to arbitrate the controversy exists, unless the court determines specified grounds exist. (Code Civ. Proc. § 1281.2.)
3. Requires an arbitration company that administers or is otherwise involved in a consumer arbitration to publish and make available to the public, as specified, a single cumulative report that contains certain information, including the name of the arbitrator, the arbitrator’s fee for the case, the percentage of the fee the arbitrator collected, and whether a fee waiver was granted. (Code Civ. Proc. § 1281.96.)
4. Requires the Governor, the State Bar, and the Administrative Office of the Courts to collect and release each year, on an aggregate statewide basis, specified information regarding the demographic data relative to ethnicity, race, disability, veteran status, gender, gender identity, and sexual orientation of judicial applicants, judicial appointees, or judicial nominees, as provided by them, and the percentage of respondents who declined to respond. (Gov. Code § 12011.5(n).)

This bill:

1. Provides that if an employment or consumer arbitration requires the drafting party to pay fees and costs before arbitration can proceed and those fees or costs are not paid within 30 days of their due date, then the drafting party is in material breach of the arbitration agreement, is in default of the arbitration, and waives its right to compel arbitration.
   1. If the drafting party materially breaches the arbitration agreement by not paying fees or costs, the employee or consumer may either:
      1. Withdraw the claim from arbitration and proceed in a court of appropriate jurisdiction; or
      2. Compel arbitration in which the drafting party shall pay reasonable attorney’s fees and costs related to the arbitration.
   2. If the employee or consumer withdraws the claim from arbitration and proceeds with an action in a court of appropriate jurisdiction, both of the following apply:
      1. Provides that the statute of limitations with regard to all claims brought or that could have been brought in arbitration are to be tolled as of the date of the first filing of a claim in any court, arbitration forum, or other dispute resolution forum.
      2. Requires the court to impose sanctions on the drafting party, as specified.
2. Provides that if an employment or consumer arbitration requires the drafting party to pay fees or costs during the pendency of an arbitration proceeding and those fees or costs are not paid within 30 days of their due date, then the drafting party is in material breach of the arbitration agreement, is in default of the arbitration, and waives its right to compel arbitration, and authorizes the consumer to proceed as provided.
3. Revises the definition of certain existing terms under the CAA, and defines the terms “consumer,” “drafting party,” and “employee,” as provided.
4. Requires an arbitration company that administers, or is otherwise involved in a consumer arbitration, to also include in the required report the demographic data relative to ethnicity, race, disability, veteran status, gender, gender identity, and sexual orientation of all arbitrators as self-reported by the arbitrators, and requires the report to indicate the percentage of respondents who declined to respond.
5. Makes various legislative findings and declarations.

Comments

Arbitration is a method of alternative dispute resolution where the disputing parties are required as a matter of law to present their disagreement to one or more private third-party arbitrators whose decisions are generally final and binding, instead of litigating the issues in court. Mandatory arbitration clauses, especially in employment and consumer contracts, have been a topic of significant controversy over the years as a form of alternative dispute resolution. Recently, a concerning and troubling trend has arisen in arbitration: employers are refusing to pay required fees to initiate arbitration, effectively stymieing the ability of employees to assert their legal rights.^[1]

In response to this emerging trend, this bill seeks to affirm that when a company refuses to pay fees required under an employment or consumer arbitration agreement it is in material breach of the arbitration agreement, is in default of the arbitration, and waives its right to compel arbitration and provide procedural options to remedy the breach of contract. In order to deter companies and employers from strategically withholding the payment of arbitration fees, the company in breach is required to pay reasonable attorney’s fees and costs and the court is required to impose sanctions.

The U.S. Supreme Court has declared that the FAA represents Congress's intent "to move the parties to an arbitrable dispute out of court and into arbitration as quickly and easily as possible.”^[2] In Sink v. Aden Enterprises, the Ninth Circuit affirmed the district court’s finding that a party is in default of an arbitration agreement if it fails to pay required arbitration fees.^[3] The court stated in Sink that interpreting the FAA to allow a party refusing to cooperate with arbitration to indefinitely postpone litigation is “inconsistent with the structure and purpose of the FAA.”^[4] As these procedures are intended to stop behavior that would undermine the intent of Congress, this measure should not frustrate the purposes of the FAA.

Under existing law, the Governor, the State Bar, and the Administrative Office of the Courts is required to collect and release, on an aggregate statewide basis so as not to identify any individual, information regarding the demographic data relative to ethnicity, race, disability, veteran status, gender, gender identity, and sexual orientation of judicial applicants, judicial appointees, and judicial nominees as provided by them and the percentage of respondents who declined to respond.^[5] This bill seeks to apply this same requirement to private arbitration companies by requiring arbitration companies to include this information in the report they are already required to provide to the public under existing law.

FISCAL EFFECT: Appropriation: No Fiscal Com.: No Local: No

SUPPORT: (Verified 5/14/19)

California Employment Lawyer’s Association (co-source)

Consumer Attorneys of California (co-source)

California Conference Board of the Amalgamated Transit Union

California Conference of Machinists

California Labor Federation

California Teamsters

Conference of California Bar Associations

Engineers and Scientists of California, IFPTE Local 20, AFL-CIO

Equal Rights Advocates

Inlandboatmen’s Union of the Pacific

PolicyLink

Professional and Technical Engineers, IFPTE Local 21, AFL-CIO

SEIU California

UFCW Western States Council

UNITE-HERE, AFl-CIO

Utility Workers of America

OPPOSITION: (Verified 5/14/19)

Acclamation Insurance Management Services

Allied Managed Care

California Association of Winegrape Growers

California Chamber of Commerce

California Hospital Association

California League of Food Producers

California Manufacturers and Technology Association

California Restaurant Association

California Retailers Association

California Trucking Association

Flasher Barricade Association

Official Police Garages of Los Angeles

Securities Industry and Financial Markets Association

ARGUMENTS IN SUPPORT: The author writes:

With SB 707, individuals who have been forced to submit to mandatory arbitration to resolve an employment or consumer dispute would be provided with procedural options and remedies under this bill when a company stalls or obstructs the arbitration proceeding by refusing to pay the required fees.

The bill will also require arbitration companies to report the same kind of demographic information that our judiciary is required to report (including gender, race and ethnicity). The purpose of this is to hopefully galvanize some better recruitment and hiring practices by the arbitration companies and highlight the fact that arbitration cannot be a fair process when the arbitrators do not remotely reflect the diverse experiences and backgrounds of the people who are bringing their claims before them, or are forced to bring their claims before them, which is very often the case.

The California Employment Lawyers Association, one of the sponsors of the bill, writes:

[T]hese cases highlight a glaring loophole in this new era of mandatory arbitration: workers and consumers must submit to arbitration, while corporations may choose their forum by either submitting to arbitration or stalling the process back to court by refusing to pay fees. This tactic typically occurs at two stages in the arbitration process. First, a company could refuse to pay the initial filing fee, which would stall the commencement of the arbitration proceedings – causing costly delays that jeopardize an employee’s ability to find evidence and witnesses – and forcing the case to restart in court. Second, a company could refuse to pay fees during the course of the arbitration proceedings – often, to prevent the release of a judgment or award favorable to the worker. Stalling the arbitration in this scenario can be even more damaging and prejudicial, as the employee or consumer has likely already invested significant resources to develop their case. Moreover, even if a case could be restarted in court, all of the work and findings from the arbitration proceeding does not carry over to the new court proceeding. Thus, without clear procedures, consumers and employees are saddled with the consequences of a stalled case, forcing them to abandon their claim or invest even more resources to relitigate in court. SB 707 aims to provide a clear process and remedies for consumers and employees in the event that the company fails to pay its required arbitration fees […]

[T]he alarming lack of diversity in the arbitration industry […] calls into question the ability of the industry to fairly adjudicate claims brought by an increasingly diverse workforce in California […] The value of diversity in our justice system cannot be overstated – to have a jury of one’s peers is enshrined in our Constitution. In California, “[i]ncreasing the diversity of California’s judicial officers to reflect the rich diversity of California’s populace” is a “key goal” and for thirteen years the state has been collecting demographic information of its judges and justices in order to track this commitment. However, these values and commitments to diversity lie fallow when more and more cases are forced into arbitration, a privatized justice system where there is no oversight or accountability, particularly when it comes to who is arbitrating these cases […]

The Consumer Attorneys of California, co-sponsor of the bill, writes:

Forced arbitration provisions have become an ever-growing aspect of consumer transactions and employment relationships. Over half of America’s workforce has been forced to sign arbitration agreements as a condition of employment. Under these terms, consumers and workers whose rights have been violated cannot pursue their claims in court, and instead must submit their claims to an arbitration proceeding that overwhelmingly favors businesses and employers.

With workers and consumers then barred from court, businesses are able to strategically withhold payment to the arbitration service provider to obstruct the arbitration proceeding and the ability to pursue a claim […]

Our courts have made advancements in diversity over the decades and this is not the case among private arbitration companies. Data should be collected and reported in order to better evaluate the issue.

ARGUMENTS IN OPPOSITION: Opponents of the bill, a coalition of various business organizations, write:

While we agree with the notion that the failure of a drafting party to intentionally pay for a significant amount of the arbitrator’s fees in an effort to avoid or delay the arbitration, should allow the employee or consumer to proceed to civil court, the remaining sanctions and damages proposed in SB 707 are completely unjustified, unreasonable, and unprecedented […]

There is no justification that requires a private company to intrude upon the privacy of an individual and require them to disclose such personal information.

Opponents also raised concerns over the definition of “consumer” and “employee,” over what constitutes a material breach under the provisions of the bill, the remedies provided for that breach, and the various sanctions in the bill.

Prepared by: Amanda Mattson / JUD. / (916) 651-4113

5/15/19 15:10:41

**** END ****

1. For a more in depth discussion, see the Senate Judiciary Committee Analysis for SB 707 (Wieckowski, 2019). ↑

2. Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., (1983) 460 U.S. 1, at 22. ↑

3. Sink v. Aden Enters. (2003) 352 F.3d 1197. ↑

4. Id. at 1200. ↑

5. Gov. Code § 12011.5(n)(1) & (n)(5). ↑

SENATE JUDICIARY COMMITTEE

Senator Hannah-Beth Jackson, Chair

2019-2020 Regular Session

Bill No: SB 707 (Author:Wieckowski)

Version: April 11, 2019

Hearing Date: April 23, 2019

Fiscal: No

Urgency: No

AMConsultant:

SUBJECT

Arbitration agreements: enforcement

DIGEST

This bill provides that if an employment or consumer arbitration requires the drafting party to pay fees and costs regarding the arbitration and those fees or costs are not paid within 30 days of their due date, then the drafting party is in material breach of the arbitration agreement, is in default of the arbitration, and waives its right to compel arbitration, and authorizes the employee or consumer to the arbitration agreement to compel arbitration or proceed in court, as specified. The bill requires the court to sanction a drafting party for failure to pay costs or fees. The bill also requires arbitration companies to include specified demographic data regarding its arbitrators as provided by the arbitrators in a report arbitration companies are already required to make under existing law.

EXECUTIVE SUMMARY

Companies have been using arbitration agreements for years to prohibit employees and consumers from having their claims heard in court or as a class action. With no other recourse left to adjudicate their claims, employees have begun filing individual arbitration claims, with one employer having over 12,000 individual claims filed against it. Some employers have been refusing to pay fees and costs required to initiate arbitration, effectively placing their employees in a procedural limbo. This bill is intended to affirm that these practices constitute material breach of an employment or consumer arbitration agreement and provide procedures for employees or consumers to pursue in order to have their claims heard in the event of such a breach. The bill also seeks to require arbitration companies to report the same demographic data required to be reported about judicial applicants, judicial appointments, and judicial nominees.

The bill is sponsored by the California Employment Lawyers Association (CELA) and the Consumer Attorneys of California (CAOC) and supported by various labor and other organizations. The bill is opposed by a coalition of business organizations, including the California Chamber of Commerce.

PROPOSED CHANGES TO THE LAW

Existing federal law provides, pursuant to the Federal Arbitration Act (FAA), that a written provision in any maritime transaction or a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof, or an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal, shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract. (9 U.S.C. § 2.)

Existing state law:

1. Provides, pursuant to the Federal Arbitration Act (FAA), that a written provision in any maritime transaction or a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof, or an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal, shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract. (9 U.S.C. § 2.)
2. Governs arbitrations in California, pursuant to the California Arbitration Act (CAA), including the enforcement of arbitration agreements, rules for neutral arbitrators, the conduct of arbitration proceedings, and the enforcement of arbitration awards. (Code Civ. Proc. §§ 1280 et. seq.)
3. Provides that on petition of a party to an arbitration agreement alleging the existence of a written agreement to arbitrate a controversy and that a party thereto refuses to arbitrate such controversy, the court shall order the petitioner and the respondent to arbitrate the controversy if it determines that an agreement to arbitrate the controversy exists, unless the court determines that:
   1. the right to compel arbitration has been waived by the petitioner;
   2. grounds exist for the rescission of the agreement;
   3. a party to the arbitration agreement is also a party to a pending court action or special proceeding with a third party, arising out of the same transaction or series of related transactions, and there is a possibility of conflicting rulings on a common issue of law or fact. A pending court action or special proceeding includes an action or proceeding initiated by the party refusing to arbitrate after the petition to compel arbitration has been filed, but on or before the date of the hearing on the petition; or
   4. the petitioner is a state or federally chartered depository institution that, on or after January 1, 2018, is seeking to apply a written agreement to arbitrate, contained in a contract consented to by a respondent consumer, to a purported contractual relationship with that respondent consumer that was created by the petitioner fraudulently without the respondent consumer’s consent and by unlawfully using the respondent consumer’s personal identifying information. (Code Civ. Proc. § 1281.2.)
4. Requires an arbitration company that administers or is otherwise involved in a consumer arbitration to publish and make available to the public, as specified, a single cumulative report that contains certain information, including the name of the arbitrator, the arbitrator’s fee for the case, the percentage of the fee the arbitrator collected, and whether a fee waiver was granted. (Code Civ. Proc. § 1281.96.)
5. Requires the Governor, the State Bar, and the Administrative Office of the Courts to collect and release each year, on an aggregate statewide basis, specified information regarding the demographic data relative to ethnicity, race, disability, veteran status, gender, gender identity, and sexual orientation of judicial applicants, judicial appointees, or judicial nominees, as provided by them, and the percentage of respondents who declined to respond. (Gov. Code § 12011.5(n).)

This bill:

1. Provides that if an employment or consumer arbitration requires the drafting party to pay fees and costs before arbitration can proceed and those fees or costs are not paid within 30 days of their due date, then the drafting party is in material breach of the arbitration agreement, is in default of the arbitration, and waives its right to compel arbitration.
   1. If the drafting party materially breaches the arbitration agreement by not paying fees or costs, the employee or consumer may either:
      1. Withdraw the claim from arbitration and proceed in a court of appropriate jurisdiction; or
      2. Compel arbitration in which the drafting party shall pay reasonable attorney’s fees and costs related to the arbitration.
   2. If the employee or consumer withdraws the claim from arbitration and proceeds with an action in a court of appropriate jurisdiction, both of the following apply:
      1. Provides that the statute of limitations with regard to all claims brought or that could have been brought in arbitration are to be tolled as of the date of the first filing of a claim in any court, arbitration forum, or other dispute resolution forum.
      2. Requires the court to impose sanctions on the drafting party, as specified.
2. Provides that if an employment or consumer arbitration requires the drafting party to pay fees or costs during the pendency of an arbitration proceeding and those fees or costs are not paid within 30 days of their due date, then the drafting party is in material breach of the arbitration agreement, is in default of the arbitration, and waives its right to compel arbitration.
   1. If the drafting party materially breaches the arbitration agreement and is in default due to not paying fees or costs, the employee or consumer may:
      1. Withdraw the claim from arbitration and proceed in a court of appropriate jurisdiction. If the employee or consumer does so, the statute of limitations with regard to all claims brought or that could have been brought in arbitration are to be tolled as of the date of the first filing of a claim in any court, arbitration forum, or other dispute resolution forum.
      2. Continue the arbitration proceeding, if the arbitration company agrees to continue administering the proceeding, notwithstanding the drafting party’s failure to pay fees or costs. The neutral arbitrator or arbitration company may institute a collection action at the conclusion of the arbitration proceeding against the drafting party that is in default of the arbitration for payment of all fees associated with the employment or consumer arbitration proceeding, including the cost of administering any proceedings after the default.
      3. Petition the court for an order compelling the drafting party to pay all arbitration fees that the drafting party is obligated to pay under the arbitration agreement or the rules of the arbitration company.
      4. Pay the drafting party’s fees and proceed with the arbitration proceeding. As part of the award, the employee or consumer is entitled to recover all arbitration fees paid on behalf of the drafting party without regard to any findings on the merits of the underlying arbitration.
   2. If the employee or consumer withdraws the claim from arbitration and proceeds in a court of appropriate jurisdiction, both of the following will apply:
      1. Authorizes the employee or consumer to bring a motion, or a separate action, to recover all attorney’s fees and all costs associated with the abandoned arbitration proceeding. The recovery of arbitration fees, interest, and related attorney’s fees will be without regard to any findings on the merits in the underlying action or arbitration.
      2. Requires the court to impose sanctions on the drafting party, as specified.
3. Requires the court to impose sanctions on the drafting party that materially breaches an arbitration agreement due to failure to pay fees or costs to initiate or continue the arbitration proceeding, such as any of the following:
   1. A monetary sanction ordering the drafting party to pay the reasonable expenses, including attorney’s fees and costs, incurred by the employee or consumer as a result of the material breach.
   2. An evidence sanction by an order prohibiting the drafting party from conducting discovery in the civil action.
   3. A terminating sanction by one of the following orders:
      1. An order striking out the pleadings or parts of the pleadings of the drafting party.
      2. An order rendering a judgment by default against the drafting party.
   4. A contempt sanction by an order treating the drafting party as in contempt of court.
4. Revises the definition of certain existing terms under the CAA, and defines new terms as follows:
   1. “Consumer” means an individual who seeks, uses, or acquires, by any means, any goods or services whether tangible or intangible, physical or electronic, in whole or in part, for personal, family, or household purposes.
   2. “Drafting party” means the company or business that included a predispute arbitration provision in a contract with a consumer or employee. The term includes any third party relying upon, or otherwise subject to the arbitration provision, other than the employee or consumer.
   3. “Employee” means any current employee, former employee, or applicant for employment. The term includes any person who is, was, or who claims to have been misclassified as an independent contractor or otherwise improperly placed into a category other than employee or applicant for employment.
5. Requires an arbitration company that administers, or is otherwise involved in a consumer arbitration, to also include in the required report the demographic data relative to ethnicity, race, disability, veteran status, gender, gender identity, and sexual orientation of all arbitrators as provided by the arbitrators.
6. Makes various legislative findings and declarations.

COMMENTS

1. Stated need for the bill

The author writes:

With SB 707, individuals who have been forced to submit to mandatory arbitration to resolve an employment or consumer dispute would be provided with procedural options and remedies under this bill when a company stalls or obstructs the arbitration proceeding by refusing to pay the required fees.

The bill will also require arbitration companies to report the same kind of demographic information that our judiciary is required to report (including gender, race and ethnicity). The purpose of this is to hopefully galvanize some better recruitment and hiring practices by the arbitration companies and highlight the fact that arbitration cannot be a fair process when the arbitrators do not remotely reflect the diverse experiences and backgrounds of the people who are bringing their claims before them, or are forced to bring their claims before them, which is very often the case.

2. Troubling trend emerging in employment arbitration

1. Background

Arbitration is a method of alternative dispute resolution where the disputing parties are required as a matter of law to present their disagreement to one or more private third-party arbitrators whose decisions are generally final and binding, instead of litigating the issues in court. Mandatory arbitration clauses, especially in employment and consumer contracts, have been a topic of significant controversy over the years as a form of alternative dispute resolution. Generally, supporters of arbitration assert that private arbitration provides a cheaper, faster, more efficient form of dispute resolution than the overburdened courts because they are able to limit discovery, set their own rules for presenting evidence, schedule proceedings at their own convenience, and select the private arbitrator who will decide their cases.

Recently, a concerning and troubling trend has arisen: employers are refusing to pay required fees to initiate arbitration, effectively stymieing the ability of employees to assert their legal rights. For example, Uber won a ruling from the U.S. Ninth Circuit Court of Appeals that required drivers who worked for the company to bring their wage claims on an individual basis in arbitration and prohibited them from proceeding as a class.^[1] As a result of this ruling, 12,500 drivers for Uber were forced to file individual arbitration demands in order to have their claims heard.^[2] However, very few of these driver’s cases have proceeded. Reuters reported:

Of the 12,500 arbitration demands filed by Uber drivers, the company has paid the requisite JAMS initial filing fee in just 296 cases, according to a newly filed petition by drivers seeking to compel Uber to pay the fees JAMS requires to launch arbitration. So far, arbitrators have been appointed in only 47 of the cases drivers have brought against Uber – and Uber has paid the arbitrator’s nonrefundable $1,500 retainer fee in a mere six cases. (Under Uber’s arbitration provisions, it’s up to the company to pay initial arbitration fees.) ^[3]

This situation is exacerbated by the fact that:

“[w]hen [Uber] was in federal court litigating to enforce its arbitration provisions, the drivers’ filings said, Uber assured the 9th Circuit that it would pay the necessary fees to allow drivers to arbitrate their claims individually. But now that drivers have actually filed demands, their lawyers said, Uber has repudiated those representations.”^[4]

Unfortunately, this situation is not an isolated one. Lyft has also been accused of preventing 3,420 drivers from moving forward on their individual arbitration claims against the company by refusing to pay the initiation fee and case management fee.^[5]

Then there is the saga of Chipotle employees who have been trying since July 2013 to have their claims of wage theft adjudicated. Much like in the case of Uber, more than 2,800 employees were required by the court to have their claims for back pay heard individually in arbitration due to an arbitration agreement Chipotle required employees to sign. Ironically, Chipotle is claiming “that the tide of arbitrations could cause it ‘irreparable harm’” and asked the court to suspend the arbitration filings.^[6] The court denied both motions and stated “Chipotle’s attempts to delay and obfuscate the claims of the Arbitration Plaintiffs in both the courts and in arbitration (the forum to which it required these employees to submit) are unseemly.”^[7] Chipotle continued to frustrate the efforts of its employees to have their claims adjudicated by failing to pay its share of the filing fee.^[8] Six years later not a single claim has been heard.

1. Failure to pay required fees and costs is material breach of arbitration agreement

In Brown v. Dillard’s, Inc, the Ninth Circuit held that refusal to participate in arbitration was a material breach of the arbitration agreement and prohibited the breaching party from asserting its right to arbitrate under the agreement.^[9] The court held:

If we … allowed [an employer] to compel arbitration notwithstanding its breach of the arbitration agreement, we would set up a perverse incentive scheme […] When a defendant in a judicial forum refuses to respond to a complaint that is properly filed and served, the court has the power to enter and enforce a default judgment. Arbitration works differently. The American Arbitration Association could not compel Dillard's to pay its share of the filing fee, and in the absence of the fee it could not proceed. Brown had no choice but to come to court. Many people in Brown's position would simply have given up. Because she did not, we have the occasion to make clear that when an employer enters into an agreement requiring its employees to arbitrate, it must participate in the process or lose its right to arbitrate.^[10]

In Sink v. Aden Enterprises, the Ninth Circuit affirmed the district court’s finding that a party is in default of an arbitration agreement if it fails to pay required arbitration fees.^[11] The court stated that interpreting the FAA to allow a party refusing to cooperate with arbitration to indefinitely postpone litigation is “inconsistent with the structure and purpose of the FAA.”^[12]

1. Narrowly tailored response to address an identified issue

In response to this emerging trend, this bill seeks to affirm that when a company refuses to pay fees required under an employment or consumer arbitration agreement it is in material breach of the arbitration agreement, is in default of the arbitration, and waives its right to compel arbitration and provide procedural options to remedy the breach of contract. In order to deter companies and employers from strategically withholding the payment of arbitration fees, the company in breach is required to pay reasonable attorney’s fees and costs and the court is required to impose sanctions. The U.S. Supreme Court has declared that the FAA represents Congress's intent "to move the parties to an arbitrable dispute out of court and into arbitration as quickly and easily as possible.”^[13] As these procedures are intended to stop behavior that would undermine the intent of Congress, this measure should not frustrate the purposes of the FAA.

1. Statements of support

One of the sponsors of the bill, CELA, writes:

These cases highlight a glaring loophole in this new era of mandatory arbitration: workers and consumers must submit to arbitration, while corporations may choose their forum by either submitting to arbitration or stalling the process back to court by refusing to pay fees. This tactic typically occurs at two stages in the arbitration process. First, a company could refuse to pay the initial filing fee, which would stall the commencement of the arbitration proceedings – causing costly delays that jeopardize an employee’s ability to find evidence and witnesses – and forcing the case to restart in court. Second, a company could refuse to pay fees during the course of the arbitration proceedings – often, to prevent the release of a judgment or award favorable to the worker. Stalling the arbitration in this scenario can be even more damaging and prejudicial, as the employee or consumer has likely already invested significant resources to develop their case. Moreover, even if a case could be restarted in court, all of the work and findings from the arbitration proceeding does not carry over to the new court proceeding. Thus, without clear procedures, consumers and employees are saddled with the consequences of a stalled case, forcing them to abandon their claim or invest even more resources to relitigate in court. SB 707 aims to provide a clear process and remedies for consumers and employees in the event that the company fails to pay its required arbitration fees.

The other sponsor of the bill, CAOC, writes:

Forced arbitration provisions have become an ever-growing aspect of consumer transactions and employment relationships. Over half of America’s workforce has been forced to sign arbitration agreements as a condition of employment. Under these terms, consumers and workers whose rights have been violated cannot pursue their claims in court, and instead must submit their claims to an arbitration proceeding that overwhelmingly favors businesses and employers.

With workers and consumers then barred from court, businesses are able to strategically withhold payment to the arbitration service provider to obstruct the arbitration proceeding and the ability to pursue a claim.

1. Statements in opposition

Opponents of the bill, a coalition of various business organizations, write:

While we agree with the notion that the failure of a drafting party to intentionally pay for a significant amount of the arbitrator’s fees in an effort to avoid or delay the arbitration, should allow the employee or consumer to proceed to civil court, the remaining sanctions and damages proposed in SB 707 are completely unjustified, unreasonable, and unprecedented […]

Opponents also raise concerns over the definition of “consumer” and “employee,” over what constitutes a material breach under the provisions of the bill, the remedies provided for that breach, and the various sanctions in the bill.

3. Demographic data reporting

1. Applying existing demographic reporting requirements for the judiciary to arbitration companies

Under existing law, the Governor is required to collect and release, on an aggregate statewide basis so as not to identify any individual, information regarding the demographic data relative to ethnicity, race, disability, veteran status, gender, gender identity, and sexual orientation of judicial applicants, judicial appointees, and judicial nominees as provided by them and the percentage of respondents who declined to respond. (Gov. Code § 12011.5(n)(1) & (n)(5).) This bill seeks to apply this same requirement to private arbitration companies by requiring arbitration companies to include this information in the report they are already required under existing law to provide to the public.

1. Statements of support

CELA, one of the sponsors of the bill writes:

The alarming lack of diversity in the arbitration industry […] calls into question the ability of the industry to fairly adjudicate claims brought by an increasingly diverse workforce in California […] The value of diversity in our justice system cannot be overstated – to have a jury of one’s peers is enshrined in our Constitution. In California, “[i]ncreasing the diversity of California’s judicial officers to reflect the rich diversity of California’s populace” is a “key goal” and for thirteen years the state has been collecting demographic information of its judges and justices in order to track this commitment. However, these values and commitments to diversity lie fallow when more and more cases are forced into arbitration, a privatized justice system where there is no oversight or accountability, particularly when it comes to who is arbitrating these cases.

CAOC, another sponsor of the bill writes:

Our courts have made advancements in diversity over the decades and this is not the case among private arbitration companies. Data should be collected and reported in order to better evaluate the issue.

1. Statements in opposition

Opponents of the bill, a coalition of various business organizations, write:

There is no justification that requires a private company to intrude upon the privacy of an individual and require them to disclose such personal information.

1. Author’s amendments

The author has offered the following clarifying amendments to align the demographic data reporting requirement for arbitration companies in this bill with the reporting requirement for judicial applicants, judicial appointees, and judicial nominees.

The specific amendments are as follows:

Amendment 1

On page 3, at line 38, strike out “(2010)” and insert:

(2003)

Amendment 2

On page 6, at line 34, strike out “data” and insert:

data, reported in the aggregate,

Amendment 3

On page 6, at line 36, strike out “provided” and insert:

self-reported

Amendment 4

On page 6, at line 36, after “arbitrators.” insert:

Demographic data disclosed or released pursuant to this subdivision shall also indicate the percentage of respondents who declined to respond.

SUPPORT

California Employment Lawyer’s Association (sponsor)

Consumer Attorneys of California (co-sponsor)

California Conference Board of the Amalgamated Transit Union

California Conference of Machinists

California Teamsters

Engineers and Scientists of California, IFPTE Local 21, AFL-CIO

Inlandboatmen’s Union of the Pacific

PolicyLink

SEIU California

UNITE-HERE, AFl-CIO

Utility Workers of America

OPPOSITION

Acclamation Insurance Management Services

Allied Managed Care

California Association of Winegrape Growers

California Chamber of Commerce

California Hospital Association

California League of Food Producers

California Manufacturers and Technology Association

California Restaurant Association

California Retailers Association

California Trucking Association

Flasher Barricade Association

Official Police Garages of Los Angeles

Securities Industry and Financial Markets Association

RELATED LEGISLATION

Pending Legislation:

AB 692 (Maienschein, 2019) provides that the statute of limitations for filing an action against an attorney for a wrongful act or omission arising from the performance of professional services is to be tolled during a dispute between a lawyer and client concerning fees, costs, or both, as specified, and the provisions regarding tolling the statutes of limitations are triggered any time arbitration is requested following an attorney commencing an action in court or any other proceeding. The bill is currently pending referral in the Senate Rules Committee.

Prior Legislation:

AB 3247 (Assembly Committee on Judiciary, Ch. 10, Stats. 2018) specified that if a court determines that grounds exist for rescission of an arbitration agreement then the court does not have to enforce the arbitration agreement.

SB 33 (Dodd, Ch. 480, Stats. 2017) added instances in which a state or federally chartered depository institution is seeking to apply a written agreement to arbitrate, contained in a contract consented to by a respondent consumer, to a purported contractual relationship with that consumer that was created by the petitioner fraudulently without the consumer’s consent and by unlawfully using the consumer’s personal identifying information as a determination a court can make which results in an arbitration agreement not being enforceable .

SB 1007 (Wieckowski, Ch. 626, Stats. 2016) provide that a party to an arbitration has the right to have a certified shorthand reporter transcribe any deposition, proceeding, or hearing as the official record, as specified.

SB 1078 (Jackson, 2016) would have required the disclosure of any solicitation made within the last 2 years by, or at the direction of, a private arbitration company to a party or lawyer for a party in a consumer arbitration, and prohibited solicitation of a party or lawyer for a party during the pendency of the arbitration, as specified. The bill was vetoed by then Governor Brown.

AB 1005 (Alejo, Ch. 113, Stats. 2013) expanded the diversity reporting requirements for judicial applicants, appointees, and nominees to include data relative to disability and veteran status, as specified.

SB 182 (Corbett, Ch.720, Stats. 2012), expanded the diversity reporting requirements for judicial applicants, appointees, and nominees to include voluntarily-provided gender identity and sexual orientation data about judicial applicants, appointees, and sitting judges.

SB 56 (Dunn, Ch. 390, Stats. 2006) required, among other things, the Governor to disclose aggregate statewide demographic data relating to ethnicity and gender provided by all judicial applicants, appointees, and sitting judges, as specified.

**************

1. O’Connor v. Uber Techs. (2018) 904 F.3d 1087. ↑

2. Frankel, Alison, Forced into arbitration, 12,500 drivers claim Uber won’t pay fees to launch cases, Reuters (Dec. 6, 2018), available at https://www.reuters.com/article/legal-us-otc-uber/forced-into-arbitration-12500-drivers-claim-uber-wont-pay-fees-to-launch-cases-idUSKBN1O52C6 (as of Apr. 15, 2019). ↑

3. Id. ↑

4. Id. ↑

5. Frankel, Alison, 3,420 Lyft drivers claim the company won’t pay arbitration fees to launch their cases, Reuters (Dec. 14, 2018) available at https://www.reuters.com/article/legal-us-otc-lyft/3420-lyft-drivers-claim-the-company-wont-pay-arbitration-fees-to-launch-their-cases-idUSKBN1OD2KC (as of Apr. 15, 2019). ↑

6. Hitzik, Michael, Chipotle may have outsmarted itself by blocking thousands of employee lawsuits over wage theft, L.A. Times (Jan. 4, 2019), available at https://www.latimes.com/business/hiltzik/la-fi-hiltzik-chipotle-20190104-story.html (as of Apr. 15, 2019). ↑

7. Order Denying Defendant Chipotle Mexican grill, Inc’s Motion for Entry of Judgement Pursuant to Fed. R. Civ. P. 54(B) (ECF No. 202) and Motion to Reinstate Stay (ECF No. 203), Kane, J., Case No. 1-14-cv-02612-JLK, Document 212, (Nov. 20, 2018), U.S.D.C. Colorado available at https://assets.documentcloud.org/documents/5669713/Chipotle-Judge-Denies-Stay-Clean.pdf (as of Apr. 14, 2019). ↑

8. Id. ↑

9. Brown v. Dillard’s, Inc, (2005) 430 F.3d 1004. ↑

10. Id. at 1012-1013. ↑

11. Sink v. Aden Enters. (2003) 32 F.3d 1197. ↑

12. Id. ↑

13. Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., (1983) 460 U.S. 1, at 22. ↑